National tax policy: canons, the 2017 policy and macroeconomic links

A state government announces a new levy, a company asks whether it is lawful, and an investor asks whether the rules will stay stable long enough to plan a factory. The answer to all three starts in the same place: the principles on which a tax system is supposed to be built.

In Nigeria those principles are written down in the National Tax Policy (NTP) of 2017. The exam expects you to explain them, apply them to a scenario and link them to government’s wider economic policy.

This topic covers the canons (rules) of taxation, the objectives, guiding principles, stakeholder duties and implementation measures of the NTP, the mandates of the three tiers of government, and how fiscal, monetary and trade policy interact. The next topic covers who actually administers tax in Nigeria. The March/July 2020 and November 2020 Pathfinder papers do not set a stand-alone question on the NTP, but its principles sit behind many scenario questions.

Key terms in plain English

Syllabus check

This topic is in syllabus area A (tax administration, 5% of marks). It covers:

• the key principles and canons of tax policy formulation;
• the objectives and guiding principles of the NTP 2017;
• the relevance of the tax system to wealth creation and employment;
• the responsibilities of stakeholders and the mandates of the three tiers of government;
• the interaction of fiscal, monetary and trade policy.

CAMA 2020 and tax policy

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

The canons of taxation

The canons are the foundational principles of a sound tax system. Governments apply them when they impose and collect taxes.

A good system is also efficient (it raises revenue at least cost without distorting resources), flexible and transparent, and it supports fiscal policy goals of stability and growth. Taxation serves four purposes: raising revenue, redistributing income and wealth, protecting domestic industry, and promoting social welfare.

The National Tax Policy 2017

The NTP is the document that sets the fundamental guidelines for the orderly development of the Nigerian tax system. It applies to all tiers of government.

Its objectives are to guide the operation and review of the tax system; provide the basis for future tax legislation and administration; serve as a point of reference for all stakeholders; provide a benchmark against which stakeholders are held accountable; and clarify the roles of stakeholders.

Guiding principles. Equity and fairness (pay according to ability, without discrimination); simplicity, certainty and clarity; convenience; low compliance cost; low cost of administration; flexibility; and sustainability (a synergy between tax policy and other economic policy).

Wealth creation and employment. Tax policies and laws should not be retroactive; should give equal investment opportunities to local and foreign businesses; should be long-term so that investors can plan; any incentive should be broad, sector-based, tenured and transparent; revenue forgone through incentives should be quantified against expected benefits and reported each year; and policy should not promote monopoly or entry barriers.

Challenges the NTP targets. A low tax-to-gross domestic product ratio; a fragmented taxpayer database and weak information exchange; multiplicity of taxes and revenue agencies; poor accountability for tax revenue; aggressive collection methods; failure to honour refunds; and laws that are rarely reviewed.

Its key recommendations include one revenue agency per level of government, an independent tax court, lower rates and a value added tax (VAT) threshold for small and medium enterprises (SMEs), an office of tax simplification, an amnesty and whistle-blowing framework, and a requirement that political parties publish their tax agenda.

Responsibilities of stakeholders

• Government (all tiers and arms): implement and review tax policy and laws; report revenue collected quarterly; give tax authorities funding and autonomy; allow three to six months between announcing and starting a new tax.
• Taxpayers: treat tax as a civic obligation, paid when due. They are entitled to information; prompt, courteous help; to object and receive a response in reasonable time; a fair and impartial appeal; and to represent themselves or use an agent. An agent acting for reward must be an accredited tax practitioner.
• Revenue agencies: treat the taxpayer as a customer; implement policy, laws and treaties efficiently; cooperate and share information; audit and investigate on time; educate taxpayers; and prevent and punish corrupt officials.
• Professional bodies, practitioners and agents: follow codes of conduct and ethics, never aid evasion or corruption, and promote compliance.
• Media and advocacy groups: promote tax education; protect taxpayers’ rights; demand transparency in the use of revenue; report accurately; and hold aspiring office holders to their tax plans.

Mandates of the three tiers of government

Tax authorities at every level should:

• register every taxable person with one nationwide taxpayer identification number (TIN), drawing on the databases of the Central Bank (Bank Verification Number), the National Identity Management Commission, the Corporate Affairs Commission and other agencies
• encourage voluntary compliance through simple self-assessment, amnesty frameworks, taxpayer service and recognition of compliant taxpayers
• make payment and collection efficient with technology
• keep automated, global-standard records
• exchange information with other authorities
• enforce civil and criminal sanctions
• fund the authority and its refund obligations adequately
• make paying tax easy
• keep financial and administrative autonomy
• use technology and tax intelligence
• settle disputes amicably, going to court only as a last resort

Implementation measures

The President and Governors publish the fiscal policy in budget speeches, work towards one revenue agency per level and sponsor a bill for a tax court. The legislature sets up taxation committees and gives the Joint Revenue Board an establishment Act.

The Ministry of Finance starts tax reform, sets up a tax policy implementation committee and an office of tax simplification, automates collection and keeps a minimum VAT threshold to protect micro-businesses. Ministries, departments and agencies report to the Ministry on implementation. Tax authorities set a national tax day and run amnesty and whistle-blowing schemes. The Independent National Electoral Commission makes parties publish their tax agenda.

Fiscal, monetary and trade policy

Fiscal policy is run by the Ministry of Finance through the budget: taxation, public spending and borrowing. Cutting taxes or raising spending lifts an economy out of recession; the reverse slows a boom. Monetary policy is run by the Central Bank of Nigeria (CBN) and controls the money supply, interest rates and credit to keep prices stable; too much money chases too few goods and prices rise.

Trade policy is the set of measures, besides exchange rate policy, that shape the size and direction of foreign trade; openness tends to raise efficiency and growth. The three share one long-run aim, economic growth. They are linked: where financial markets are shallow and deficits are large, the central bank may have to finance the deficit. That is fiscal dominance, and monetary policy then only accommodates fiscal policy.

Worked examples

1. The forms and consultant breach simplicity and convenience.
2. Collection costing more than the yield breaches economy.
3. Under the NTP the same facts breach the principles of low compliance cost and low cost of administration.

1. The first two show horizontal equity.
2. The third shows vertical equity, ability to pay.

1. Taxpayers are entitled to a response to an objection within a reasonable time.
2. Revenue agencies must treat the taxpayer as a customer and act efficiently.
3. Delay also breaches certainty.

1. The rate rise is monetary policy.
2. The tax cut is fiscal policy.

How to score full marks

• Name the canon or principle in a scenario, then give the fact that proves it.
• Group stakeholder answers by stakeholder, with the duty and the entitlement.
• Separate policy, law and administration when asked about a tax system.
• Link a tax measure to growth, jobs and investment.
• Use the NTP wording: “compulsory payment without direct benefit”.

Common mistakes in the exam

• Listing canons with no link to the scenario.
• Mixing up fiscal and monetary policy.
• Giving stakeholder duties without the taxpayer’s rights.
• Saying the NTP is a law; it is a policy document.
• Forgetting that the policy covers all tiers of government.

Quick revision

• Tax system = policy + laws + administration.
• Eight canons; seven NTP guiding principles.
• Stakeholders: government, taxpayer, revenue agencies, professional bodies, media.
• One revenue agency per level; tax court; TIN for all.
• Fiscal: Ministry of Finance. Monetary: CBN. Trade: foreign trade measures.
• CAMA 2020: ss. 305, 308, 377(1), 378, 404.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

Recent ICAN papers are written, although older papers such as May 2014 included multiple-choice questions. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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